Investors Uncomfortable With Your Valuation, Lack Of Liquidity And Exit Timing?

Gaining access to qualified investors (individuals, syndicates, funds) is only a part of gaining capital for¬†launch or growth. Making a compelling financial offer that will get investor backing is the other part of¬†this battle, the part frequently neglected. Possibly because you assume your passion and business model¬†will speak for itself, and possibly because you assume you‚Äôll just work that out in negotiation. If this¬†were true, then why do 97% of companies that approach angel networks (whether live or online) fail to¬†get significant funding from those sources, AFTER they have access? I know this stat as a previously¬†active member of Tech Coast Angels and active in the online community today. I believe the reason is the structure of the deals presented, and I‚Äôm going to suggest a highly viable¬†alternative. The problem is selling equity. Selling equity (ownership, stock, etc.) in your venture requires¬†an exit. Yet exit timing and probability is highly problematic since 2001 and getting worse. This is not a¬†function of the markets; it‚Äôs a function of the ever-increasing rate of change of technology. You and the¬†investor community can‚Äôt escape the fact that there is no way to predict when you‚Äôll ever be able to¬†enjoy a liquidity event. In evidence, today the average time to a liquidity event for angel-funded ventures is about 9 years. Is¬†there any way you and your investors can honestly predict the state of technology and the viability of¬†your business idea in the year 2024 with today‚Äôs rate of change? It‚Äôs ridiculous. Exits are increasingly a¬†crap-shoot. Investors might as well throw darts at a phone book when selecting companies to support. Knowing this, investors are increasingly insecure about every investment and compensate by¬†assembling large portfolios and follow increasingly rigid standards of selection. Then we demand large¬†shares of ownership where every deal pays at least 10X if not 30X on exit. All this knowing that most will¬†never pay at all. The answer is to stop selling equity. Start selling a share of revenue: a share of the future top-line¬†revenues of your company known as revenue royalties, revenue participation, synthetic royalties or¬†revenue based finance – Google to learn more. This structure is now increasingly well accepted in the¬†angel and fund communities. I know of six funds that focus almost exclusively on these kinds of deals,¬†and I‚Äôm an advisor to one of them. There‚Äôs also a growing community of high-net worth individuals¬†who‚Äôve invested in revenue royalties as well. The idea is not new; it‚Äôs well established in mining and oil¬†drilling ventures. Arthur Lipper, a Wall Street legend and publisher of Venture magazine, began¬†recommending this structure ahead of its time in the 1980‚Äôs. See his opus Financing and Investing in¬†Private Companies. It‚Äôs real – it works. Why does it work in today‚Äôs fast-paced world? With revenue royalties, investors appreciate that liquidity¬†begins almost immediately and does not depend on an exit event that may never occur. Revenue royalties turn uncertainty into near certainty. This makes a real difference. I‚Äôve recommended it to a number¬†of companies in the last few years and more than half have succeeded in raising all of the capital they¬†needed, and quickly. This can‚Äôt be a coincidence. In addition to winning a ‚Äúyes‚ÄĚ from investors, revenue royalties offer a number of other significant¬†advantages to a growing enterprise in terms of privacy, legal obligations, control, and freedom to¬†operate. There is also a lot more to learn, in terms of how to compute the revenue royalty terms of¬†agreement and to present them to investors. It‚Äôs worth the effort in both your ability to close¬†investment deals, the reduced time it will take, and the long term benefits to you and your company. You can learn more about revenue royalties online at and You can also write to me directly at for a no-charge¬†eBook on revenue royalties that goes into greater depth.

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